Another Mortgage Settlement; Shutdown Update for Lenders; Rates are low Because...
This government shutdown is over 215 miles of fencing along a 2,000-mile border. Rate-wise, there is growing thought that the Fed has overshot rate changes and that there will be 0 increases in 2019. In other “fun with numbers” news, STRATMOR tells us that, traditionally, 82% of residential production comes from 40% of the loan officers out there. Lenders have certainly been fervently cutting back on the 60% of MLOs who are only producing 18% of closed volume. And while we’re talking about the changing face of loan officers, here’s a nice study on age groups: not every originator is in their 70s.
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Legal Resolution/Settlement
Did Shellpoint Mortgage and New Penn Financial LLC violate the Massachusetts Act Preventing Unlawful and Unnecessary Foreclosures and the state's Consumer Protection Act? Whether or not they did, $4 million exchanged hands.
Shutdown and Home Buyers
A lack of liquidity can shut down a company faster than anything. U.S. Treasury Secretary Steven Mnuchin contacted the chief executives of the nation's six largest banks over the weekend to reassure the markets they have access to sufficient liquidity to continue normal operations. The move follows a distressing week in which an interest-rate rise and mounting US-China trade tensions unsettled the markets, and the US government entered a partial shutdown. Much to the markets dismay, President Donald Trump spoke to his advisers about exercising executive powers under the Federal Reserve Act to fire Federal Reserve Chairman Jerome Powell. Trump has repeatedly attacked Powell and the Fed over their decision to raise US interest rates as both equity and bond markets flash warning signs of a possible recession ahead.
Congressional appropriations expired at midnight on Friday, 12/21/2018, and a partial shutdown of government services deemed non-essential has been implemented. As Congress has not passed a budget or a budget extension, a partial shutdown of government services deemed non-essential has been implemented.
Results of the shutdown include the furlough of certain federal employees and a curtailment of certain operations at several federal agencies. Examples of mortgage loan related activities that may be impacted include, but are not limited to: verification of employment for borrowers who work for federal government agencies, Social Security Administration SSN and SSI validations, Internal Revenue Service tax return and W-2 transcript generation, new conditional commitment issuance by USDA, and various operations of the Federal Housing Administration. But issuance and renewal of flood insurance policies by the NFIP has been re-authorized to May 31, 2019, so we can look forward to having that used as a bargaining chip all over again.
What about lenders funding loans under various programs? Of course, lenders and investors will set their own policies, but going through my inbox on lenders… Fannie Mae and Freddie Mac? No impact. Using history as a benchmark, from 2013 here was Fannie’s response and Freddie’s approach. (Neither has sent out a similar update for this shutdown.) VA? No impact. FHA? No impact on issuing new case numbers and insuring loans. It appears that DELRAP condominium approvals can continue to be processed, but HRAPS condominium approvals cannot be processed and should not be submitted to some lenders for processing during the government shutdown. USDA? Appears it will temporarily be unable to issue new commitments or guarantee closed loans.
The Internal Revenue Service (aka, IRS) will be unable to issue tax return transcripts. (For loans that require IRS Transcripts, some lenders are asking the underwriter to condition the loan for the borrower to obtain transcript from IRS website. Lenders seem to be saying that any loans with discrepancies must be resolved prior to investor delivery, and that completed 4506-T forms continue to be required. If Form SSA89 is required, lenders appear to be asking that the validation of the social security number must be received prior to closing. Or lenders will continue to fund conventional and government products without the required transcripts, but they must be obtained post-closing once they are available. It seems that most conventional and government products do not require transcripts for W2/fixed-income borrowers, unless tax returns are needed in the file for other purposes.
My informal poll of lenders who do jumbo, transcript requirements for jumbo and non-conforming (like portfolio, niche, expanded and closed-end seconds) products, lenders are requiring LOs to require the transcripts to be obtained prior to closing. Of course it depends on the jumbo investor criteria. The same with bond (aka, housing authority products, Housing Finance Agency) programs: check with the individual agencies first but in general I am seeing that these products will require the transcripts to be obtained prior to closing.
For loans that require flood insurance, proof of flood insurance coverage is required prior to closing. LOs know that the FHA does not accept private flood insurance. And for borrowers employed by the federal government who are on a mandatory furlough from their jobs must return to work prior to closing to use the income for qualification purposes. Yes, the National Flood Insurance Program (NFIP) was reauthorized over the weekend through May 31, 2019, but they are advising that no new policies or renewals will be issued during shutdown. From what I am reading investors and lenders are stating that flood insurance requirements must be met prior to closing and cannot be waived.
A quagmire? Any lender doing a loan for an impacted Federal employee where a Verbal Verification of Employment (VVOE) is required. Some lenders are saying that for conventional and VA products, if a borrower is employed by the federal government and a Verbal Verification of Employment cannot be obtained prior to closing due to the shutdown, a VVOE dated after closing will be acceptable. But for FHA and USDA products, my informal poll shows that unless FHA/USDA (as applicable) issues an announcement advising they will allow the VVOE to be obtained after the note date, a VVOE must be obtained prior to closing. Housing Authority products will be based on the direction provided by the housing authority. Check with jumbo investors for their criteria but it seems most of these products will require the VVOE to be obtained prior to closing.
For the IT folks, FHA systems such as FHA Connection, CHUMS, etc., will generally be operational, however actions that require intervention by FHA personnel will either be delayed or suspended. CAIVRs is expected to be available but FHA is not able to ensure that information contained in CAIVRs will remain up-to-date.
USDA issued a policy that any LO or lender should read. In the past it has not issued Mortgage Loan Note Guarantees during government shutdowns. Most lenders are accustomed to the vagaries of the rural program and accept loans with contingent Conditional Commitments issued by Rural Housing “subject to the availability of commitment authority" if available.
Capital Markets
Besides the shutdown, the main headline so far this month was that Federal Reserve increased the target for the Fed Funds rate by 25 basis points. Widely expected, what wasn’t expected was the Fed’s outlook for prolonged economic strength over the next two years compared to the financial market’s expectations for the economy to cool. As it stands, the Fed is expecting three additional rate hikes during that timeframe. Needless to say, the markets weren’t happy with the guidance and the recent sell-off continued and received additional fuel when a funding agreement could not be reached at the end of the week; causing a partial government shutdown. Other economic headlines were mixed as real disposable income increased 0.2 percent and real consumer spending increased 0.3 percent. Q3 GDP was revised lower to +3.4 percent. Existing home sales increased for the second straight month in November however remain 7.0 percent lower than one year ago. New housing starts increased 3.2 percent in November spurred by a nearly 25% increase in multi-family dwellings. Meanwhile single family starts have fallen for the last three months. It is probably no surprise that builder confidence eased in December.
Inflation? Not really. In the last week or so we’ve learned that increasing consumer inflation took a pause in November as falling gasoline prices kept the consumer price index unchanged for the month. On a year-over –year basis, prices increased by 2.2 percent, down from October’s 2.5 percent annual increase. Core inflation remained near the Fed’s target, increasing 2.2 percent from October to November. The decrease in energy prices offset increases in shelter, used cars and trucks, transportation services and medical care. Services make up the largest portion of the core index and have seen steady increases month-over-month and firms become more willing to raise prices to keep up with the tight labor market. It is unlikely that this upward pressure will subside in the near-term. Shifting to retail sales, total sales rose 0.2 percent in November as gas station sales were down 2.3 percent due to the drop in fuel prices. Holiday sales which exclude gas stations, auto dealers and food service establishments, rose 0.8 percent in November and 4.4 percent for the year. While trade concerns abound, economic data continues to show the US economy humming along as we move into 2019.
Looking at the markets from Monday, which was a holiday-shortened trading day, the plummet in stocks grabbed the headlines while the “flight to safety” helped bond prices. Money moved from stocks into shorter-dated maturity instruments. There was news around the world: U.S. Trade Adviser Peter Navarro saying that an agreement with China in 90 days will be difficult to attain, Defense Secretary James Mattis’ resignation, China suggesting there would be significant cuts to taxes and fees, a plan to withdraw 7000 troops from Afghanistan, about half of the current deployment, and some momentum behind the idea of calling a second referendum on Brexit.
In this country New York Fed President Williams stated that being data dependent means listening to the markets and that the balance sheet runoff is not "inflexible," implying the Fed could reevaluate its view in 2019 if necessary. Monday we saw, as equities sold off, the yield curve steepened. President Trump named current Comptroller of the Currency, Joseph Otting, as acting director of the FHFA beginning on January 6 when he replaces Mel Watt, whose term is expiring although Mr. Watt was under investigation of sexual misconduct in the workplace. President Trump continued his tirade against the Fed, tweeting, “The only problem our economy has is the Fed. They don’t have a feel for the market. The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!” The 10-year note closed yielding 2.75%.
There is little news of substance today. If you like two-month old news, this morning we’ll have the S&P/Case-Shiller Home Price Indexes for October at 9AM ET, expected to show a slight increase. Also ahead are the Richmond Fed Manufacturing and Services Indexes, and the Treasury auctioning off $18 billion in reopened 2-year notes and $41 billion 5-year notes. With all of this going on, there isn’t much move so far in rates this morning: the 10-year is yielding 2.75% and Agency mortgage-backed security prices are worse a few ticks (32nds).
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